Squeeze on salaries hits households and retailers

Pay dismay: a combination of stagnant wages and inflation means tough times ahead for consumers and the High Street

The dwindling spending power of hard-pressed Britons was laid bare today after a surprise fall in wage growth in the three months to February.

The slide in annual pay growth to 2.2% when most pundits were forecasting rising pressure on wages is good news for the Bank of England's inflation-watchers.

But with inflation still running at 4% despite a surprise fall in March, it spells more pain for family budgets squeezed by VAT hikes and soaring oil prices as wages fall in real terms. It is also bad news for a host of High Street retailers dependent on flagging consumer spending.

Despite a 17,000 fall in unemployment to 2.48 million over the quarter, the sluggish wage growth is a clear sign that workers are still not confident enough to push for bigger pay packets, while most of the private sector has embarked on a two-year pay freeze as part of plans to tackle the deficit.

The figures will soothe nerves on the Bank of England's monetary policy committee over the risk of high inflation feeding into wage demands and becoming entrenched, further easing the immediate threat of a hike in interest rates. Nida Ali, senior economic adviser at the Ernst & Young ITEM club, said: "The possibility of a wage price spiral in the coming months seems unlikely. This makes a strong case for maintaining the current stance of loose monetary policy."

Average pay is rising at less than half the rate seen before the credit crunch and recession struck, when annual wage growth came close to 5%, according to the Office for National Statistics.

The detailed figures showed manufacturing pay growth stalling in the three months to February, but the pain is worst in the struggling building industry and among retailers. Wages in construction fell 0.9% year-on-year while retailing salaries are down 0.8%.

The stretch facing household budgets has been underlined by the first fall in disposable incomes for 30 years during 2010. Many pundits predict a repeat this year with petrol prices close to record highs and the looming threat of rising energy bills, with the Centre for Economics and Business Research predicting that households will be £910 worse off on average this year. Vicky Redwood, senior economist at Capital Economics, said: "With pay growth still well below the rate of inflation, the continued squeeze on real pay suggests that the recent weakness of consumer spending is unlikely to let up any time soon."

Leisure loses out

Bars, restaurants and leisure firms are among the biggest casualties of the squeeze on wages as punters kept their wallets shut during the first three months of the year, Begbies Traynor warned today.

The insolvency specialist flagged up a 68% rise in the number of bar and restaurant companies who are facing financial distress compared with a year ago.

Its figures also showed a 60% jump in the number of companies focused on leisure and cultural activities which are in difficulty.

The sharp rise far exceeds the 15% rise in UK companies overall who are in the danger zone.